What Is Fraud?

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What Is Fraud?

Fraud is a deliberate deception done to get your money illegally or deprive you of your rights. It is all around us, and you have probably heard of such examples as Ponzi schemes, envelope stuffing, and telemarketing scams. Let’s take a brief look at several types of fraud.

Pyramid schemes

If you are invited to a business venture that involves being recruited and then paying to join its salesforce, you might be involved in a scam; it depends on whether that salesforce is being formed to sell a real product, service, or investment … or whether it is just taking your money to pay earlier recruits. The latter is a true pyramid scheme—that is, a hierarchy business in which the only income is coming from new recruits who provide the "earnings" to those above them. These are illegal. A true pyramid scheme will inevitably collapse. It cannot continue as such.

Not all pyramid businesses are scams, however. Multi-level marketing, for example, uses a pyramid structure to recruit a salesforce in order to sell a real product or service to people outside the program.

How can you spot one? Pyramid schemes are not always easy to spot. Here are some signs:

• You are expected to continually recruit new sellers and buyers to keep the pyramid alive.
• It focuses much more on recruiting than on the product or service.
• For a small amount of work, you are promised sky-high profits.
• If products are offered, they cost more than similar ones on the market.
• The operation makes unrealistic claims about the product or service.
• The company does not appear to have a permanent location.
• The company does not seem to have a customer base.

Work-at-home scams

You’ve seen the ads that say "Make lots of money working from the comfort of home!" And you may have wondered why, if that’s true, more doctors and lawyers aren’t doing it! The ads promise a large amount of money—more than the market rate—for a small amount of work. Often, no training is required. The real purpose of most such schemes is for the promoter to take money from you by charging you fees, charging you for products or equipment, and rejecting your work after you have already paid for the products or equipment. There are, of course, legitimate work-at-home opportunities, and there are others that exist in a gray area.

Some classic work-at-home scams include stuffing envelopes, processing rebates, reshipping items (usually stolen ones), "email processing," and assembling products via a starter kit you pay for, only to be told later that the products "don’t meet specifications."

Who falls prey most often to these schemes? Usually senior citizens, stay-at-home parents, the uneducated, migrants, unemployed people, and low-income people.

The common signs of these scams are generally the same as those of pyramid schemes.

Telemarketing scams

Phone scammers are very good at making "opportunities" sound legitimate. They often use official-sounding language like "high-yield investment opportunity," "prime bank note guarantee," and similar terms. They make the deal sound like a unique, urgent opportunity. They also know how to appeal to your human qualities—your sympathy, your desire to be a good person, and your desire to not disappoint others.

Some classic telemarketing scams include charity appeals, investments, prizes for which you have to pay some fee in advance, timeshares, work-at-home opportunities, fake technical support people asking you to visit some Website, fake IRS agents demanding payment over the phone (the real IRS never contacts people this way), and offers that seem tailor-made to certain ethnic or age groups.

How can you spot one? Phone scams have most of these signs:

• Fast-talking salesperson who guarantees an unusually high return for little risk.
• "Free" vacations, prizes, or gifts, for which all you need to do is pay some fees.
• The deal is described as "special" or "unique" or a "once in a lifetime opportunity."
• A request for your credit card number or bank account number.
• A demand for quick action. Scammers don’t want you to think about the deal.
• A quickly established feeling of rapport.
• An assurance that the company is solid and no investigation is necessary.
• No return information about the company. Instead, scammers will use a mail drop or a courier to pick up your money. Scammers typically avoid the U.S. mail system.

Money transfer schemes

In a money transfer scheme, the scammer promises to transfer money to you via your bank account and let you keep a small "commission," and then asks you to transfer money to some other party. The incentive for you is the commission. Usually, the scammer proceeds to empty out your bank account, but in some cases might let you keep some or all of the money. Money like this might come from organized crime or other scams, and the scammer might eventually extort it from you.

In the event that a transfer does go exactly as the scammer promised, you are likely being used to cover someone’s tracks, and the law may find its way right to your bank account.

Investment scams and frauds

Although it is easy to read a story about the latest investment scam and shake our heads at the gullible people, there is a reason these scams persist: they work. The scammer uses detailed, sophisticated, official-sounding language that is over the heads of most victims. The scammer projects an air of authority, which soothes the fears of the victims. Even educated people can be taken in. Investment scams come in many forms, such as these:

• Ponzi schemes. Similar to a pyramid scheme is a Ponzi scheme, named for Charles Ponzi, who defrauded investors out of millions in the early 1900s. In a Ponzi scheme, the schemer gathers money from a large group of people to allegedly invest it, but instead of investing it, keeps most of it, and pays small "dividends" to the earliest joiners out of the funds of later joiners. These "dividends" give it an air of legitimacy. The scheme collapses when not enough new investors can be found to keep up the payment of dividends.
• Unscrupulous or unlicensed agents and brokers. Just because people are agents or brokers does not mean they always act ethically. Sometimes they can be enticed by scammers into promoting fraudulent investments. Sometimes they don’t even know how these investments work.
• "Pump and dump" fraud. This is market manipulation that creates artificial demand for an investment, usually a stock. This artificial demand causes the market price to go up (the "pump"). At some point, the perpetrators sell off the investment (the "dump") and realize a profit. Pump-and-dump schemes are usually promoted in Internet chat rooms, social media, and email lists.